The US petrochemical renaissance could spell the death of the small polymer producer in Latin America.

Or not.

But there’s no denying that the threat facing these companies is quite real and quite easy to figure out.

US olefins production, particularly ethylene, is set to expand by easily 30% over the next five years on the back of cheap feedstocks resulting from the shale gas boom. Canada and Mexico will also see ethylene and polyethylene expansions.

Polymer production expansions will accompany that growth (mostly in PE, so far), and it is no secret that the US will look to increase market share in Latin America, a region net short plastic resins.

The region, which for discussion purposes encompasses Mexico, Central and South America and the Caribbean, has companies big enough to hold their ground and compete — Brazil’s Braskem (polyethylene, polypropylene and polyvinyl chloride), Mexico’s Pemex Petroquimica (PE) and Mexichem (PVC) come to mind — but even these will face tremendous challenges.

Each week Polymerscan works diligently to provide useful and current coverage of the continuously changing, global plastic resin marketplace. With Polymerscan you will receive more than 200 price assessments that cover the regional and domestic markets in Asia, Europe, the Middle East, the United State and Latin America. Products on our radar screen include LDPE, LLDPE, HDPE, PP, PVC, PS and ABS.

So what about the “smaller” guys? The region has a number of small- to medium-sized polymer producers scattered mainly through Mexico and South America, with capacities that range from 50,000 to 500,000 mt/year

They are an interesting bunch, to say the least. Some, like polypropylene producers Indelpro in Mexico and Petroken in Argentina (LyondellBasell) as well as PE makers Dow Argentina and Petrodow in Chile (Dow Chemical), enjoy at least some level of backing from US majors.

Others, such as Ecopetrol Polietileno and Propilco in Colombia, Propilven (PP) and Polinter (PE) in Venezuela and Pemex Petroquimica are chemical subsidiaries of state-controlled companies. A few others, including Petroquimica Cuyo in Argentina and Petroquim in Chile, operate independently.

Many of these companies have serious decisions to make regarding the long-term strategy of their businesses. Representatives from some of these companies have expressed at least some interest in potential partnerships with US-based majors, if these don’t exist already.

And at least one is considering redrawing its business model, morphing from producer to producer/distributor, even if this means becoming a seller of a product long viewed as competition.

This would certainly apply to anyone making polypropylene south of the US-Mexico border, but mainly in South America. The reason is simple: If North America, and mainly the US, begins to flood the market with cheaper polyethylene, PP makers in the region could see demand destruction, stemming from uncompetitive pricing on their part, and/or product substitution, as some PP demand could be lost to certain grades of PE.

So why not dig in those heels and invest in expanding?

The financial requirements for major expansions are out of reach for many of these companies, whether they have government backing or not. Even the bigger players in places like Brazil, Argentina and even Venezuela, have seen expansion projects stalled or, in a best-case scenario, advance at a snail’s pace, for a variety of reasons, including but not limited to lack of capital, will and/or feedstock.

And that’s key. In the near-term, at least, many of these companies do not enjoy the same levels of feedstock availability, much less the lower costs that US companies are enjoying.

But these smaller companies do boast a significant business aspect beyond a customer base and stable demand: Many of them have solid distribution networks.

The distribution element of the business should be of particular interest to any US-based company looking to expand market share in Latin America, as many lack the proper distribution infrastructure and/or channels beyond Mexico. Another key aspect to doing business “south of the border” is the personalized service and the trust factor many of these smaller players have developed and nurtured over their years doing business at the domestic or regional level. A handshake still goes a long way in Latin America, just as speaking the same language does.

Most US majors already have a solid grasp on Mexican polymer markets, thanks in part to proximity and the North American Free Trade Agreement.

Not so in South America, and the fact that US PE and PP producers are so focused on strategies that maximize profits in the domestic market, all the while limiting exports to Latin America, whether because of product availability issues and/or uncompetitive pricing, may not be sitting well with current and potential customers in the region.

US majors must keep this in mind: Many of these customers are beginning to be wooed by Asia-based sellers looking to grow their presence in the region.

And the smaller players in Latin America should remember that, in many cases, success — in this case survival — comes to do those who adapt.

AUTHOR BIO

Bernardo Fallas,
Reporter

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Comments

Sebastian at July 22, 2013 07:36

Excellent article. Expect big changes in the business models. Joint ventures among smaller players is an option. But, the main challenge is for managment and boards to accept that the landscape is different now. Service and product portfolio will be key.